Report and Recommendation of the President to the Board of Directors Project Number: 41548 September 2009 Proposed Loan and Asian Development Fund Grant Kyrgyz Republic: Issyk–Kul Sustainable Development Project CURRENCY EQUIVALENTS (as of 31 July 2009) Currency Unit – som (Som) Som1.00 = $0.023 $1.00 = Som43 ABBREVIATIONS ADB – Asian Development Bank ADF – Asian Development Fund BRD – Biosphere Reserve Directorate EA – executing agency EIA – environmental impact assessment EIRR – economic internal rate of return EOCC – economic opportunity cost of capital FIRR – financial internal rate of return GAP – gender action plan GIS – geographic information system ICB – international competitive bidding IDEP – Interregional Department for Environmental Protection IEC – information, education, and communication MIS – management information system NCB – national competitive bidding PAF – project assistance facility PIO – project implementation office PMO – project management office SAEPF – State Agency for Environmental Protection and Forestry UNESCO – United Nations Educational, Scientific and Cultural Organization WACC – weighted average cost of capital WEIGHTS AND MEASURES cum – cubic meter lcpd – liters per capita per day MT – metric ton GLOSSARY novostroiki – semi-informal settlements oblast – a territorial administrative unit rayon – district vodokanal – water and sewerage service provider in city enterprise tazalyk – solid waste management service provider in city enterprise state ecological – approval accorded by State Agency for Environmental expertise Protection and Forestry for compliance with Kyrgyz Republic laws prior to proceeding with construction NOTES (i) The fiscal year (FY) of the Government and its agencies ends on 31 December. (ii) In this report, "$" refers to US dollars. Vice-President X. Zhao, Operations 1 Director General J. Miranda, Central and West Asia Department (CWRD) Director M. Westfall, Urban Services Division, CWRD Team leader V. Padmanabhan, Urban Development Specialist, CWRD Team member{s} H. Chen, Counsel, Office of General Counsel M. Davila, Young Professional, CWRD M. Kunzer, Senior Environment Specialist, CWRD C. Mambetova, Project Implementation Officer, Kyrgyz Resident Mission, CWRD I. Setyawati, Social Development Specialist, CWRD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page LOAN AND GRANT AND PROJECT SUMMARY MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems 3 C. Development Opportunities 5 III. THE PROPOSED PROJECT 5 A. Impact and Outcome 5 B. Outputs 5 C. Special Features 8 D. Project Investment Plan 8 E. Financing Plan 9 F. Implementation Arrangements 9 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 13 A. Major Benefits and Impacts 13 B. Major Risks and Mitigation Measures 17 V. ASSURANCES AND CONDITIONS 18 A. Specific Assurances 18 B. Conditions for Loan and Grant Disbursement 19 VI. RECOMMENDATION 19 APPENDIXES 1. Design and Monitoring Framework 20 2. Urban Sector Analysis 24 3. External Assistance to the Sector 28 4. Infrastructure Improvement Component 29 5. Enterprise Resource Management Component 30 6. Detailed Cost Estimates and Financing Plan 32 7. Implementation Arrangements 33 8. Implementation Schedule 34 9. Procurement Plan 35 10. Summary Poverty Reduction and Social Strategy 42 11. Gender Action Plan 46 12. Financial Analysis 48 13. Economic Analysis 54 SUPPLEMENTARY APPENDIXES (available on request) A. Cost Estimate Spreadsheets and Maps B. Financial Management Assessment of the Executing Agency C. Outline Terms of Reference for Design and Supervision Consultants D. Outline Terms of Reference for Information, Education, and Communication Consultants E. Outline Terms of Reference for Management Information System Consultants F. Outline Terms of Reference for Geographical Information System Consultants G. Institutional and Financial Sustainability H. Financial Analysis Spreadsheets I. Economic Analysis Spreadsheets J. Environmental Impact Assessment K. Land Acquisition and Resettlement Due Diligence Report LOAN AND GRANT AND PROJECT SUMMARY Borrower Kyrgyz Republic Classification Targeting classification: Targeted intervention Sector (subsectors): Water supply and other municipal infrastructure and services (water supply and sanitation, waste management, urban sector development) Themes (subthemes): Environmental sustainability (urban environmental improvement), social development (human development), capacity development (institutional development) Location (impact): Urban (medium) Environment Category A: An environmental impact assessment (EIA) was Assessment undertaken, and the summary EIA was disclosed on 1 June 2009. An updated EIA is detailed in Supplementary Appendix J. Project The Issyk–Kul Sustainable Development Project (the Project) is the first Description phase in a longer-term initiative by the Asian Development Bank (ADB) to support environmental management and to improve urban service delivery in the Issyk–Kul Oblast. ADB and government collaboration in Issyk–Kul will ensure that urban services interventions will increase access to potable water and safe sanitation, including use of proven technologies for treatment and disposal of solid and liquid waste. The Project will (i) improve urban infrastructure, including sewerage and sanitation, solid waste management, water supply, and community upgrading; and (ii) improve service delivery through better enterprise resource management. The Project covers the cities of Balykchy, Cholpon–Ata, and Karakol. Its outputs are: (i) replacing a 13.4-kilometer (km) sewer network (specifically addressing pumping mains to sewage treatment plants); rehabilitating pumping stations in Balykchy and Karakol; extending the sewer network by 12 km to uncovered areas in Karakol; and supplying relevant tools, equipment, and vehicles for sewer maintenance; (ii) re-engineering 42.5 hectares of waste dumps into sanitary landfills, closing existing dumps in all three project cities, providing waste segregation and recyclable sorting equipment, and supplying vehicles and equipment for waste collection and transport; (iii) installing 8,550 water meters, training vodokanal enterprises in meter reading and leak control, constructing a presedimentation treatment tank at the Karakol water headworks, replacing a 2 km corroded transmission main in Balykchy, and reconstructing 10 boreholes (with treatment, energy efficient pumps, storage, and protection facilities) in Balykchy and Cholpon–Ata; (iv) providing in the three project cities, water and sanitation facilities in pre-schools, schools and neighborhoods, and public conveniences in markets, public centers, health care organizations, and public institutions; and ii (v) implementing an enterprise resource management component comprising a management information system, accounting and financial management, geographic information system, asset inventory and management, and institutional effectiveness program for cities, vodokanal enterprises and tazalyk enterprises. Rationale Lake Issyk–Kul (“warm lake” in Kyrgyz) is the world’s second largest saline lake; a Ramsar site of globally significant biodiversity; and a United Nations Educational, Scientific and Cultural Organization (UNESCO)-designated biosphere reserve. The lake forms a significant part of Issyk–Kul Oblast and contributes to its economic growth by providing tourism opportunities. Attracting approximately 1 million tourists annually—equivalent to 70% of the country’s annual tourist of 1.4 million persons—the lake is a major economic driver in the region. Increasing tourism has resulted in the construction of many resorts that are now sprawled around the lake's northern shores. However, existing water supply and sanitation infrastructure—including solid waste management—is decrepit, dysfunctional, and poorly maintained. Current infrastructure is unable to serve the high number of tourists, which exceeds the resident population by a factor of four. Excessive pressure on existing infrastructure is partially responsible for the lake's pollution. The country development strategy, 2009–2011, emphasizes environmental sustainability. The Project, and its focus on protecting the lake, features under the strategy’s investment project for the Issyk–Kul region. In February 2009, the Concept of Sustainable Development of the Ecological and Economic System of Issyk–Kul was passed through a presidential decree. Subsequently, the Government of Kyrgyz Republic passed a resolution in May 2009 that prioritizes implementation of the Project. ADB-led investment and policy dialogue in the region will improve the infrastructure and quality of urban services, foster tourism, and preserve the lake's environment. Institutional, legal, and municipal finance assessments in Issyk–Kul will provide a suitable platform for developing ADB's urban services sector development strategy for Kyrgyz Republic. Development of performance-based service contracts through the Project will also improve opportunities for public–private partnerships in the water supply and sanitation sector. Impact and The Project is expected to improve the health of resident population in Outcome the Issyk–Kul Oblast and